Remarks at U.S.-China Business Council Luncheon

AS PREPARED FOR DELIVERYThursday, January 13, 2011CONTACT OFFICE OF PUBLIC AFFAIRS202-482-4883

Commerce Secretary Gary LockeRemarks at U.S.-China Business Council Luncheon

Thank
you John, for that kind introduction. And thank you for having me here
today.

We are
today less than a week away from an important State visit by Chinese President
Hu Jintao.

More
than two decades ago, on my first trip to mainland China, I could not imagine
that the U.S.-China relationship would eventually become so consequential.

Nor
could I have imagined a scene like we witnessed a few days ago: Defense
Secretary Gates joining together with his Chinese counterpart to stress the need
for stronger military ties between China and the United
States.

In 1989, I came in from Shanghai’s airport on a
rickety, Russian-made bus, and stepped into that city’s dimly lit streets into a
world very different than the one I left in the U.S.

There were swarms of bicycles – young men with
their dates balanced on handlebars, grandparents pedaling to the market, boys
and girls with white-knuckle grips on their parents’ shoulders. Bikes
everywhere.

Shanghai then was a gritty, industrial city
filled with low-rise buildings.

There were no skyscrapers. Few cars.

There was little sign of what was to come.

Today, Shanghai’s skyline is dotted by more than
400 skyscrapers. Go to the Shanghai World Financial Center – one of the tallest
buildings in the world – and you can stay at a Park Hyatt Hotel with a lobby on
the 79th floor.

Those bike paths I saw on my first visit have
been replaced by elevated freeways shuttling people and commerce at a frenetic
pace.

To see
it is to be awed, and I am every time I go back to China.

The explosive growth in places like Shanghai has
helped lift almost 200 million people out of poverty. In the years ahead,
hundreds of millions more Chinese citizens will join the middle
class.

The United
States welcomes this growth, because it’s good for the people of China; it's
good for the global economy; and it's important for U.S. companies who offer
world-class products and service, products and services that can improve the
quality of life for the Chinese, while providing jobs for American workers back
home.

With the
U.S.-China Business Council’s help, this has become perhaps the most important
bilateral trading relationship in the world.

China is
the top destination for American exports, behind just Canada and Mexico. And
America is the number one national market for Chinese exports.

In the
past 20 years, U.S. exports to China have increased by a factor of 12; imports
from China have increased more than 30-fold.

However, we are at a turning point in the
U.S.-China economic partnership. Last year, China became the second largest
economy in the world. And the policies and practices that have shaped our
relations over the past few decades will not suffice over the next few
decades.

So today, I'd like to talk a bit about how we can
move forward and ensure that we can unlock the full potential of the U.S.-China
commercial relationship in the early 21st century.

The
gross trade imbalances between our countries are a good place to start, because
they have the potential to threaten global stability and prosperity.

And I
think a great illustration of that can be found in, of all places, Trenton, New
Jersey.

Many of
you have likely taken Amtrak up to New York, and when you pass by the Delaware
River in New Jersey, you see that famous sign: Trenton Makes and the World
Takes.

Well,
replace Trenton with China, and you have a simplistic, but pretty accurate
description of the global economy over the last few
decades.

China
and the United States benefited tremendously from this arrangement in recent
years.

American
consumers got an impressive array of low-cost goods. And in its transition into
one of the world’s top exporters, China was able to lift millions of its
citizens into a fast-growing middle class.

But it’s
not sustainable. The debt-fueled consumption binge in developed countries like
America is over.

And
countries like China are beginning to realize that there are limits to purely
export-driven growth.

That's
why we need a more equitable commercial relationship. And it is within our
reach.

The
United States is doing its part to facilitate global adjustments by increasing
private savings and exports, as well as taking steps to bring down its long-term
fiscal deficits to a sustainable level.

And the
Chinese leadership is making the rebalancing of its economy one of the
cornerstones of its forthcoming five-year plan.

China is
aiming to promote domestic consumption through a variety of measures, such as
boosting the minimum wage for its workers and building an improved social safety
net. Changes like these will hasten the rise of a middle class that wants the
same cars, appliances, fashion, medical care and other amenities that have long
been enjoyed by consumers in the Western world.

The
Chinese government is also putting an intensive focus on strategic emerging
industries, with more high-value work in areas like healthcare, energy and high
technology.

And the
Chinese have signaled that they want foreign businesses to help develop these
sectors by entering joint ventures and by conducting more research and
development in China.

This is
assistance that U.S. companies are eager to provide, so long as China deals
meaningfully with concerns about intellectual property protection, as well as a
variety of other issues I will talk about later.

Such
cooperative projects can serve as the foundation for a stronger economic
relationship between China and the U.S.

But
China’s long-term success at addressing the concerns of international businesses
will help determine whether it realizes its economic vision – a vision in which
China is a leader in innovation and a producer of higher-value goods and
services.

Here's
the good news: we are already seeing examples of just how this future could play
out, as our businesses and our governments collaborate to tackle some of the
world’s greatest challenges.

Just
look at what's happening with the new Energy Cooperation Program that Secretary
Chu and I announced while in China in October 2009 to promote more collaboration
between Chinese and American companies on energy issues. One of the founding
corporate members of the program, Boeing, is partnering with Air China and Petro
China to research a new generation of aviation biofuels that don't rely on food
crops.

If this
venture is successful, it could reduce the carbon footprint of airplane travel,
and avoid the negative impact that other biofuels have on the global food
supply.

Or look
at what’s happening with Duke Energy, one of America's leading utilities, which
has signed an agreement for joint research with China’s largest energy company,
Huaneng, and with the Chinese
government’s Thermal Power Research Institute.

Today,
there are scientists and researchers shuttling between the companies and the
research institute, working to develop cutting-edge solutions for
cleaner-burning coal and carbon sequestration.

The
Chinese and American governments are also working together on a variety of
transportation issues, including how to spur the deployment of more high-speed
rail. China has embraced high-speed rail and has developed its infrastructure
at a tremendous rate. Starting from scratch, China has constructed and put into
service over 4,000 miles of high-speed routes in the last decade – making
China’s the longest high-speed rail network in the world.

In
meetings last year, officials and experts from the Department of Transportation
and China’s Railway Ministry met in Cambridge, Massachusetts, to share
information on the development of high-speed rail standards. And at the state
level, the Chinese government has signed cooperation agreements with the State
of California on its high-speed rail project to link Anaheim and San
Francisco.

There
is, however, a sobering side to U.S.-China commercial relations: For every story
like Duke Energy’s or Boeing’s, there are many more that are never
written.

When I
talk to business leaders across America, they continue to express significant
concerns – shared by business around the world --about the commercial
environment in China – especially China's lax intellectual property protection
and enforcement, lack of transparency in government decision-making and numerous
indigenous innovation policies that often preclude foreign companies from vying
for Chinese government contracts. These policies mandate that products must be
made, conceived and designed in China.

It’s important
to note that since China formally joined the WTO nine years ago, it has made
important progress opening its market. Tariffs have come down, private property
rights are steadily evolving and great strides have been made to free the flow
of commerce across China's borders.

On balance, the
competitive playing field in China is fairer to foreign firms that it was a
decade ago. And we commend the Chinese for that.

It is also not
lost on countries in the West that on our march towards industrialization, we
sometimes protected native industries with policies that today would mobilize an
army of WTO lawyers in opposition.

But those
policies were folly then, and they are surely folly now. After World War II,
the United States and a growing community of nations painstakingly built a
global trading system based on the freer flow of goods, ideas and services
across borders.

And the creation
of the World Trade Organization in 1995 ensured that countries would be held
accountable for their commitments to open markets and lower
barriers.

China has
benefited tremendously from this international trading system, especially since
it joined the WTO in 2001. The United States and other foreign nations have
every right to seek more meaningful commitment and progress from China in
implementing the market-opening policies it agreed to when it joined the
WTO.

From our
experience, there are usually five things that need to happen to turn these
promises into reality.

It
starts with the easiest step: a statement of principle from Chinese officials
that action will be taken to solve a market access issue.

Next,
that agreement has to be codified into binding law or regulations.

Third,
the law or regulation needs to be faithfully implemented by the central
government.

And
fourth, it needs to be implemented at the local and provincial
levels.

Only
after all these things have happened can you arrive at the fifth, final and most
important step, which is where this new law or regulation becomes a norm – an
accepted way of doing business in China's commercial
culture.

When it
comes to indigenous innovation, intellectual property or a variety of other
market-access issues, an enduring frustration is that in too many cases only the
earliest steps are taken, but not all five.

Perhaps
an agreement is made, but it never becomes binding. Or perhaps there's a
well-written law or regulation at the national level, but there's lax
enforcement at the provincial or city level.

A few
weeks ago, the Commerce Department and the office of the U.S. Trade
Representative welcomed Vice Premier Wang Qishan and other leading
Chinese officials for the 21st Joint Commission on Commerce and Trade, where we
worked through a variety of specific trade issues.

It was a
productive meeting. Vice Premier Wang and his team were responsive to our
concerns and they pledged action in a variety of areas critical to American
businesses.

They
agreed to remove administrative and regulatory barriers discriminating against
American companies selling everything from industrial machinery and telecom
devices; to those that restrict U.S. participation in the development of
large-scale wind farms in China.

They also agreed to
revise one of their major government procurement catalogues to ensure a level
playing field for foreign suppliers and to reduce the use of counterfeit
software in government offices and state-owned
enterprises.

Additionally,
Vice Premier Wang asked the Commerce Department and the U.S. Trade
Representative to partner with him on a public
campaign to reduce intellectual property rights violations in China, which he is
leading.

The American
government welcomes these commitments from China.

But to be clear,
they are only a first step. What was agreed to at the JCCT were important
statements of principle and policy – but they must be turned into concrete
action with results.

Take last year’s
JCCT, when the Chinese agreed to remove a local content requirement for wind
turbine suppliers – a positive step forward.

But soon after,
China’s government employed a rule that required foreign businesses seeking to
build large scale wind farms in China to have prior experience with such
projects in China. The rule might have been different than the local content
requirement, but it had the same effect – making it tougher for foreign
companies to compete with China’s domestic companies.

At this year’s
JCCT, we persuaded the Chinese to modify that rule as
well.

Or look at the
issue of intellectual property. We have heard Chinese leaders condemn IP-theft
in the strongest terms, and we’ve seen central government laws and regulations
written or amended to reflect that sentiment.

But
American and other foreign companies, in industries ranging from pharmaceuticals
and biotechnology to entertainment, still lose billions of dollars from
counterfeiting and IP-theft in China every year.

For
example, in the United States, for every $1 in computer hardware sales there is
about 88 cents in software sales. But in China, for every dollar in hardware
sales there is only eight cents in software sales.

According to the Business
Software Alliance, that discrepancy is largely explained by the fact that nearly
80 percent of the software used on computers in China is counterfeit.

So America
welcomes Vice Premier Wang’s pledge to accelerate China's crackdown on
intellectual property violations. And China will have a very willing partner in
this endeavor in the United States. But we will be focused on meaningful
outcomes.

I
recognize I'm not the first foreign official to express concern over the
commercial environment in China. But it would be a mistake to portray this
concern solely as U.S. self-interest masquerading as
advice.

The
Chinese economy is increasingly moving up the global economic value chain, where
growth is created not just by the power of a country’s industrial might, but
also by the power of its people’s ideas and their inventions.

In the
long run, economies with poor intellectual property protections and inconsistent
application of market access laws will lose out on generating great new ideas
and technologies. And they’ll lose out on the jobs that come with producing new
products – jobs critical to an expanding middle class.

The
damage won’t happen overnight. I freely admit that companies and countries can
gain short-term advantages from lax rules in the commercial space.

But over
time, if innovators fear that their inventions or ideas will be stolen or
discriminated against, one of two things will happen – they’ll either stop
inventing, or they’ll decide to create or sell their inventions
elsewhere.

Ultimately, all that the United
States seeks is a level playing field for its companies, where the cost and
quality of their products determines whether or not they win business.

That is
the ideal we strive for in the United States.

And our
commitment to open and competitive markets is a big reason why we remain the
number one destination for foreign direct investment in the world.

We understand
that China’s modernization and evolution towards a more market-oriented economy
is a process that will take time.

China has 1.3
billion people. Seven hundred million of them still live in rural areas; many
with little electricity or running water. It took the United States over 100
years to build the electrical transmission capacity it has today.

To meet the
rising demands of its own consumers, China will have to build a similar amount
of capacity in just 15 years.

These are
enormous undertakings. And it’s understandable if, in the past, China’s
immediate development goals took precedence over other
concerns.

With millions of
Chinese coming in from the countryside looking for work, it isn’t necessarily an
easy decision to close down a factory producing counterfeit goods, when that
factory is providing badly needed jobs.

So what we’re
discussing here are real and significant challenges. For market reforms to
continue, it will take constant vigilance – not just from the United States, but
from all countries and businesses around the world that benefit from rules-based
trading. And from Chinese business and government leaders, who themselves have
a strong stake in ensuring that China is friendly to global innovation and
international competition.

In front of us is the opportunity
for China and the United States to lead the world economy in the early 21st
century to create a new foundation for sustainable growth for years to come.

We can’t tell exactly what that
future will look like.

But we can be certain that it
will be a better future if the Chinese and American governments pursue
cooperation over confrontation in the economic sphere.

Cooperation that will put
millions of our people to work.

Cooperation that will develop
technologies to solve the most pressing environmental, economic and social
challenges facing the world today.

This is the great opportunity
before China and the United States. We just have to seize
it.